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Predictions that retailers would increasingly find themselves filing bankruptcy, whether for the first or second time, are proving true mid-year. See January 2017 Alix Partners Survey at p. 2. In the first three months of 2017, Bloomberg reported that 14 retail chains intended to seek court protection. Thus far in 2017, first-time bankruptcy filers include recreation stores such as Gander Mountain and apparel chains such as Wet Seal, American Apparel and Payless Shoe Stores. Most notable among repeat filers is RadioShack. Commentators and analysts attribute the rising retail bankruptcies to competition with online retail-behemoth Amazon, as well as massive debt loads dating back to solvency efforts during the recent recession.

Parties involved in retail bankruptcies should be aware of certain key legal and practical issues that arise under chapter 11 of the Bankruptcy Code. These issues include:

  • Leases. Retail stores only have an initial 120 days, with possible extension to a maximum 210 days, to assume or reject non-residential leases, absent consent of the landlord otherwise. 11 U.S.C. § 365 (d)(4).
  • Reclamation Rights. A seller who sells goods that the debtor receives within 45 days of the bankruptcy filing can reclaim the goods, or demand payment for the goods, if the debtor was insolvent at the time of receipt, the goods were sold in the ordinary course of the debtor’s business, and the seller makes demand within the proper time period. 11 U.S.C. § 546(c). The seller has an administrative claim (preferable to general unsecured claim) for that portion of the goods received by the debtor within the 20 days before bankruptcy. 11 U.S.C. § 503(b)(9).
  • DIP Financing. If the debtor isn’t facing down certain and rapid liquidation, then a loan to help finance the bankruptcy and operations throughout the case (DIP Loan) is most likely necessary. Imagine the more common scenario where a lender who entered into a loan and security agreement with the debtor to fund its operations years before bankruptcy (the “Pre-Bankruptcy Secured Loan”) then gives the debtor a secured loan after bankruptcy to fund its operations and the bankruptcy costs (the “DIP Loan”). Usually the DIP Loan lender wants certain conditions that improve its position with regards to payment of the Pre-Bankruptcy Secured Loan and wants absolute priority as to the DIP Loan. Courts are not in agreement, however, as to whether the rights of the DIP Loan lender can effectively relate back to the Pre-Bankruptcy Secured Loan and prime intervening reclamation rights, discussed above. This can make it extremely difficult to secure a DIP Loan. See Ryan J. Works and Amanda M. Perach, Holding On to Reclamation Rights Under In re Reichhold Holdings, ABI Journal, January 2017, p. 14.
  • Shipping Issues. If the debtor receives goods, like apparel, from overseas shipments and doesn’t pay for the freight, its agreements with the shipping company or freight forwarders often responsible for these shipments may provide the freight forwarders and/or shipping company with what the author refers to as a ‘sprawling lien.’ In other words, the shipping company and/or freight forwarders lien for the unpaid freight could attach not only to the specific shipment of goods, but also on other goods of the retailer being transported by the shipping company to the debtor. See In re World Imports, 820 F.3d 576 (3d Cir. 2016).

Retail bankruptcies are expected to continue and even increase throughout 2017. According to Moody’s Investment Services, no less than 22 retailers are at risk of filing. Moodys Retail Announcement. On the front-end, landlords are having a difficult time negotiating lease terms with uncertain tenants and keeping their commercial spaces occupied. Because of the harsh deadlines and massive number of stores involved, what seems most necessary for debtors, landlords, and other creditors alike is to identify and prepare for issues as early as possible.


For some time chapter 11 debtors have increasingly used bankruptcy to sell assets and cease operations through what is easily the cheapest way to exit a chapter 11—dismissal.  The concept to which I am referring is a certain kind of voluntary dismissal, known as a ‘structured dismissal,’ where a debtor effectively winds up its business in a dismissal order by, among other things, distributing all its assets.  Doing so avoids the administrative expense of enduring the chapter 11 plan process.  Typically, a chapter 11 debtor does not find itself in such a fortunate position unless it has struck a deal with and therefore, obtained the consent of most creditors.

Historically, structured dismissals have flown under the radar, or when scrutinized have passed muster, where the dismissal conditions treated creditors in accordance with the priority scheme laid out by the Bankruptcy Code.  See e.g., In re Buffet Partners, Case No. 14-30699, 2014 WL 3735804, *3 (Bankr. N.D. Tex. July 28, 2014).  It’s easy to see why a structured dismissal with distributions according to the ‘absolute priority rule’ might be “in the best interests of creditors and the estate,” the statutory test under section 1112(b)(2).  The debtor and its estate are saved the time and the administrative expense of the Plan and Disclosure Statement process, thereby enhancing creditor recovery.  However, in some instances, senior creditors have opted to permit some of the proceeds of their collateral to be directed to a junior class in order to gain support or at least acquiescence from that class.  In the formal Plan context, this is known as a “Gift Plan” and that was what was attempted by the debtor in Czyzewski et. al. v. Jevic Holding Corp., Docket No. 15-649 (slip opinion) (Mar. 22, 2017), 580 U.S. __ (2017).

The debtor in Jevic attempted to violate the Bankruptcy Code’s priority scheme for distributions to creditors in its structured dismissal.  This led to the Supreme Court’s recent 6-2 decision, which held that a structured dismissal cannot violate the Bankruptcy Code’s ‘absolute priority rule’ without the consent of affected creditors.

Specifically, the Jevic dismissal was impermissible because it paid certain general unsecured claims before paying other unsecured wage-claims in full.  The ‘absolute priority rule’ provided that the wage-claims were senior to the general unsecured claims pursuant to section 507 of the Bankruptcy Code.  What is interesting about the facts that led to this situation is that the debtor and its attorneys in Jevic worked diligently to obtain settlements with both the general unsecured creditors and with the wage-claimants.  While impressive, this consensus-building fell short because the senior wage-claimants didn’t agree with the deal struck with the junior unsecured creditors.  While not conclusive from the Supreme Court decision, in the interim it seems clear that structured dismissals are still permissible so long as they don’t run afoul of the ‘absolute priority rule.’  It is also possible, although not certain, that a debtor can complete a structured dismissal that upsets the priority scheme of the Bankruptcy Code, if all parties affected consent.

The Jevic opinion can be found here.